Borrowing money for day to day household expenses is wrong, but most products for sale by businesses are sold on credit with 30 day terms. (sometimes less, sometimes a LOT more) Often, the product can be sold, money received, before the supplier has to be paid and thus, no out of pocket expense. I don't know the terms of the oil business but I've not seen the attendant outside paying cash to the driver either.
Managing cash flow in an important part of running a business. When prices are on the rise, it can be difficult. In my own industry, a TL of material used to be $20,000 and in two years went to $42,000. Yes, it made cash flow more difficult, yes, a few marginal businesses in the industry went away, but the well run ones are still around and making a profit.
It is not uncommon to borrow money for inventory in some industries. Clothing, toy, building industries comes to mind.
Sorry for the delay in the reply, Ed. I was out trying to find a lender to advance me money at prime (6.25%) to purchase inventory on which I can realize 4.3% profit.
Strangely, there do not appear to be many available.
There are plenty. Seriously. The 6.25% you talk about is an annual rate. The 4.3% is based on the turnover. So you buy $20,000 in gas and sell it for $20,860. You borrow the money for only 30 days at a cost of $104 so you are ahead by over $700.
When you talk about other industries, you are also talking longer terms and much, much larger markups. Without buying inventory on credit, the economy as we know it would collapse. How do you think banks build those nice buildings?
Trivia Question: How/why is the John Hancock Tower in Chicago named what it is?
So what if the price goes up? You have the inventory at a committed price and you know your markup covers costs. Next time around you buy at the higher price and do the same thing. This has been going on for centuries. Charlie will pay the going rate at the time.
George, I think you are going a little off the deep end here. Immediate to above: 6.25% interest is *annual* interest rate, surely you are not telling me that you think it is going to take our fictitious gas retailer a full year to retail his trailer-load of gasoline for that 4.3% profit? I would suspect that load should be gone within a month, thus making the annualized return something on the order of 48%, and the ability to pay off the short term loan a fairly easy business case to demonstrate.
Given your premise here, when the cost of gasoline is dropping, does the retailer drop the cost of his inventory by 5 cents per gallon on the last
3000 gallons in the tank when he knows his future wholesale load will be 5 cents less?
Properly managing cash flow is obviously important to any business; but a smart business will have put a certain amount of reserve aside (in an interest bearing account of some sort) in order to cushion the various fluctuations in wholesale prices. In a number of commodity sales, it would be nearly impossible for a retailer to raise his price based upon anticipated future costs simply due to the fact that if he were to do so, his competitors would eat his lunch -- i.e, he wouldn't have to worry about paying those higher costs as his current inventory wouldn't sell until his competition was also selling that future high-cost stock. The gasoline industry doesn't seem to suffer from that restraint.
+--------------------------------------------------------------------------------+ If you're gonna be dumb, you better be tough
+--------------------------------------------------------------------------------+
No, Ed. In the first place, if I have to hire money, I lose double. I lose the money I had to gain from the original, but didn't, and the money I had to pay to hire it. If the price continues upward, I will either have to hire more money or buy less fuel - simple. Has it escaped you that this borrowing discussion is a précis of the trouble in many US industries? Or any place inflation is rampant?
As a business, I'm trying to earn a living for myself and my employees. We're not there to provide cheap gasoline to consumers.
You and my left-leaning friend Charlie might find this amusing
formatting link
. Seems that trying to keep the consumer happy with cheap prices is another set of problems altogether.
Of course, we knew that from the experience of other command economies which have created universal poverty for their citizens in this last century. Seems if you keep prices down, you have to keep wages down too, otherwise, someone has to pay the difference. Then folks find they can't hope to get ahead, no matter what, and ... well, you know the result.
Fortunately, few gas stations are in the position we've been beating around. They never own the fuel they sell, just as they never own the potato chips. They're paid so much a gallon or bag for what they sell, but the price is set a stage or two up the line, where the market risks are taken.
First, as I posted to Ed, there's a double loss - profit not made and extra expense incurred. Even a few cents rise in wholesale could get him borrowing next week. Remember, the price can go up when he's sold 5% if his inventory as well. Why should he pay for someone else's cheap gas?
As to being off the deep end, you wouldn't happen to know the actual interest rate for a loan against future profits? I grab two figures off the top for illustration and you nitpick them. My turn. What's the average return to dealer per gallon, and what's the interest rate for a short-term loan? I think your search will show the profit margin lower and the interest rate higher. Which has nothing to do with the basic principle, that final user pays the price that keeps the pumps working. As it should be.
Oh, really? Is that why my pal down at the corner market has to hand a check to the guy who delivers his chips, another check to the guy delivering cigarets, another check to the Coke delivery guy and on down the line.
George, my right leaning correspondent, I strongly suggest you get out and TALK to some of these retailers whose businesses you are trying to describe.
As an incidental point, WTF does my politics have to do with this discussion? I am a liberal in many ways, conservative in many--unlike GWB and pals. If that bugs you, then it bugs you. To be honest, reading your wrong-headed descriptions, I hope it does.
OK, you have the opportunity to buy 100 widgets at $1 each. You know everyone reading this newsgroup would love to have one and is willing to pay $2 each. Problem is, cash is tight and you don't have the hundred bucks to lay out to double your money.
Your choices are:
You do nothing, you earn nothing
You borrow 0 and agree to pay back 0 in 30 days. You sell the widgets, have the 0 in hand and pay back the load and have left.
From what you posted above, the best choice is number 1 and you continue to plod along as a working schelp instead of a wealthy entrenpneur. Your choice.
Ha it escaped you that prudent borrowing is the way our economy to be run or we would not have one? Greedy as they can be, banks do serve a useful purpose and mot sucessfull businesses have a good working releationship and credit line. That is how many businesses grow. Please do not confuse smart business borrowing with dumb consumer borrowning. Paying 18% interest on a credit car for a dinner at a restaurant is dumb. Buying a house with a mortgage is smart and for most of us, the only way we can ever afford to buy a house.
This is true. I'm not agains making a profit and a good one at that. But rasining prices on existing inventory is not always the best idea. Yes, it can be done and is done, but it is not a requirement of a good business.
formatting link
Government pricing is never right. Want to discuss farm subsidies?
Farm subsidies are a fun subject around here. Nearly all the local farmers are conservatives until you discuss discontinuing farm subsidies. Then government payouts are just fine.
Well, as a farmer I don't think they're "fine" in the sense you imply and I really doubt the ones you speak of do, either. The problem is multif-faceted and largely created by government intervention starting
60-70 years ago and continuing to this day. In the overall scheme of ag subsidies, those in the US are significantly less than most of our trading partners--just look at the the strikes in France, for example, when trade discussions regarding reducing subsidies to meet US levels is the topic of negotiations...
However, given that much of our small grain export markets were forcibly taken from us by unilateral trade embargoes (rembember the boycott over Russian intervention in Afghanistan as one?) which were subsequently repeated after being promised that exports would be a major plank of the future USDA policy. This caused a near complete collapse of US small grain markets from which we have yet to recover meanwhile allowing the clever Argentinian, Brazilians, Australians, et al. to build their export markets (all heavily subsidized, btw) to replace the former US markets.
Is a "free'er" world market by a desirable goal? --Sure. The recent CafTA agreement is a little step--we'll see if the tariffs against US ag products are actually removed in the other participants--I'm not holding my breath waiting, nor expecting any action from US gov't to enforce them if they're not.
Are you pleased that at least one area of the US economy has some positive foreign trade balance or would you just as soon that we be totally dependent on foreign producers for all food supplies, not only oil (to at least get back on the OT thread topic :) )?
Well, there's not a whole lot of grain grown around here, besides feed corn for cattle. Mostly, the farms are cows (meat or milk), truck, or tobacco. We're not hitting on much internationally with out beef these days, but I don't know what the milk market from overseas is like. Truck farms tend to stay fairly local, at least those around here. Tobacco? I'm not sure much is left of their subsidies, but I did read that the feds are forcing the cigaret makers to pay subsidies to farmers, in lieu of tobacco payments. Of course, there are other types of farms around here. My cousin and her husband raise Appaloosas, for instance. There are two miniature horse ranches (?) within a 15 mile radius. Someone is raising alpacas, and there is the inevitable goat farm. No one bothers with sheep any more. My BIL got out of that part of farming some years ago, because he was tired of feeding coyotes.
There seem to be price supports and tax breaks on much of the above, if not all. Should there be? I have no idea. I wouldn't farm unless it were a matter of starving to death otherwise. I come from a long line of small farmers on both sides, and almost 60 years ago decided I was too damned lazy to work that hard. But I wouldn't mine coal either. Yet my father in law mined coal to get the money to buy his first small farm. Different strokes.
My point was not that the farmers don't deserve the price supports...I don't know, and, in truth, I don't think anyone else REALLY knows. But they insist that such supports have nothing in common with welfare and similar programs to help the poor. I contend they are wrong. It is similar in effect if not exact performance to corporate welfare--and anyone who thinks corporations don't get breaks has not examined what states are offering these days in the way of tax breaks and general butt kissing of CEOs to get 30 more jobs in an area.
Well, we're so far removed from a fully open economy as to make any discussion that doesn't recognize that meaningless...is it good is a whole discussion of what is meant by "good" simply to start.
Only thing I will say regarding farm subsidies wrt to pure welfare payments is that there's a difference in my mind anyway between someone who takes a check to sit around the house and do nothing as opposed to one who is producing a marketable and needed product for which markets have artificially been removed or made inaccessible by actions of the government...
???? what profit not made? One would assume that the selling price of the gas being sold was set with a profit margin for the dealer. Your argument heretofore has been that the price being raised was not additional profit, but was to cover the future cost. He is still making profit (retail price - wholesale cost) on the current inventory.
Again, given his current inventory, where is the extra expense?
Why, how, and where is *he* paying for someone else's cheap gas? He is retailing current inventory for greater than the wholesale price previously set. Your argument here holds water *only* if, when he knows that his next tanker load of gas is going to be less, that he then lowers the current price in anticipation of that. I notice you did not address that scenario. After all, since he raised prices in anticipation of higher wholesale prices, then he obviously already has that cash in hand, so can lower the price on the current inventory (even if it results in short term loss) because he already made his profit on previous cheaper gas.
Properly leveraged and managed businesses know that their wholesale prices will vary (both up and down), they thus set aside a portion of income to pay for that variation. When prices are favorable to them, that cash flow box is replenished, when it is not favorable is when they draw on that cash flow box. In all cases, they are making a profit, it's just the cash flow that is in flux.
I simply showed how in your illustration that were mixing up annual interest rate with short-term profit margin -- those numbers cannot simply be added and subtracted. The exact numbers are irrelevant.
Irrelevant to the argument you were trying to portray.
Nowhere in my argument have I ever indicated that free-market economics is not valid, nor have I indicated that what retailers are doing is somehow illegal (unless, of course they are agreeing with one another to what the prices should be -- that *is* illegal). They are setting the price to what the market will bear. What I am arguing with is the ridiculous attempt to justify those price hikes through the argument that because their future costs will be higher, somehow the current inventory cost should be increased, and the rationale being advanced for why that is a valid argument. There are probably several approaches for rationalizing those hikes on current inventory, for example, the retailer is acting as an investor and selling based upon appreciated value -- there are probably others premises that could be used as well. However even in that case, then the retailer as investor must be prepared to accept a loss when future values drop even though existing supplies have not been replenished -- those actions don't seem to take place.
Frankly, if we are tired of being held hostage to unstable gas prices, we (the people, not the government) need to be looking at alternatives. Increased domestic exploration, identification of alternate fuel sources, etc. The oil industry has been so consolidated for numerous reasons, some due to greed on the part of business, some due to power-lust on the part of governments, some even due to unintended consequences on the part of tree-huggers that competition, for the most part does not exist. What is needed is competition at a higher level.
+--------------------------------------------------------------------------------+ If you're gonna be dumb, you better be tough
+--------------------------------------------------------------------------------+
And just as frankly, a solid amount of conservation on the part of the consumer would help a lot. Refusal to buy barge sized vehicles for single person use, better planning of trips and similar tactics would have the oil companies paying attention to their market again, though given the proliferation of 11-12 MPG vehicles over the past decade or so, it might well take many years.
| Mark & Juanita wrote: || Frankly, if we are tired of being held hostage to unstable gas || prices, we (the people, not the government) need to be looking at || alternatives. Increased domestic exploration, identification of || alternate fuel sources, etc. The oil industry has been so || consolidated for numerous reasons, some due to greed on the part || of business, some due to power-lust on the part of governments, || some even due to unintended consequences on the part of || tree-huggers that competition, for the most part does not exist. || What is needed is competition at a higher level. | | And just as frankly, a solid amount of conservation on the part of | the consumer would help a lot. Refusal to buy barge sized vehicles | for single person use, better planning of trips and similar tactics | would have the oil companies paying attention to their market | again, though given the proliferation of 11-12 MPG vehicles over | the past decade or so, it might well take many years.
Everyone wants someone /else/ to solve the problem. Preferably at no cost.
The "no cost" part is more important than you might guess. In my day job I sell furnaces that come with a lifetime supply of free fuel. You'd think they'd sell like hotcakes.
I dunno. When gas hit $1.00 a gallon and stayed there, I got rid of my
15 MPG pick up and bought a Geo. Actually, I bought the Geo earlier, and let the PU sit unless I was picking something up. Add that to a Stratus (POS, should anyone ask [whole model line, AFAICT], but it's paid for and low miles). I now have an S10 pick up. Not big enough, but close (Dakota would be just right). So I've made the adjustment to a car that pulls about 30-32 MPG on a trip, and a PU that gets 27 MPG. The Geo? It wore out. Not great cars, but they were also cheap. IIRC, a new one was about $8500. I paid about half that for mine, used.
You are making solar furnaces, right? The problem I've seen with them, thus far, is that the payback period is so long as to make the fact that the fuel is free somewhat irrelevant. Maybe your's are different, if so, I'd be open to more information (although, in southern AZ, solar air conditioning would be much more cost-effective).
+--------------------------------------------------------------------------------+ If you're gonna be dumb, you better be tough
+--------------------------------------------------------------------------------+
I can't figure that one out. Back in the late 70's solar was getting some government money and the industry was starting to move. Then the funds dried up and people just did not want to invest or pay the initial cost. I would have though the past 12 to 15 months you'd have people lined up at the door waiting to buy.
I would have thought that most any new house built today would have a least a partial solar heat supplemented by other fuel.
HomeOwnersHub website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.